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In the next month China and Japan (China’s
main trading partner) will no longer use the U.S. dollar as the only currency
in trade with each other. They will use the Yuan and the Yen directly with
each other. This will see the dollar removed from a large chunk of the
world’s trade –in itself, not a very large percentage, but a significant
one. It’s the start of a trend that is set to grow. We’ve no
doubt that China is tailoring its trade with all its trading partners to use
the dollar only so far as it is required to deal with the U.S. and other
dollar-dependent nations. Oil from Russia utilizes the Yuan and Rouble, and Australia has arranged a similar deal.
The
purpose of foreign exchange and gold reserves is to provide ‘global
money’ (which includes gold) for potential rainy days. China will
therefore build up reserves in all the currencies that it will trade in. All
this will take place at the expense of the dollar. Currently the U.S. dollar
is used in around 76% of the world’s trade. More importantly for the
dollar, its use as a reserve currency (it currently comprises 63% of global reserves)
will diminish in line with the growth of Yuan/ other currencies.
Currencies in Japanese/Chinese Trade
To
explain the process more clearly, when a Chinese company buys goods from
Japan, it sells Yuan and buys dollars in its place, for delivery to the Japanese
supplier. The Japanese supplier then sells the dollars for Yen. This brings
many risks to the transaction because both the Yen and the Yuan are
constantly moving against the dollar and the dollar is driven by its own
economy and pressures. By going direct, these risks and extra costs are
eliminated. Likewise the influence of the U.S. over global trade is
diminished, for this trade will no longer require the vast amount of trade to
go ‘via New York’.
U.S. Power and Influence Changing
Earlier
this month, we produced an article that discussed the purchase of Iranian oil
in the Yuan and Indian Rupee. U.S. influence and power over world oil
supplies has been complete because of the sole use of the U.S. dollar in the
oil price. But when Iran dropped the dollar from its oil sales, this power
was undermined. The U.S. tried to bring India and China on board in punishing
Iran –over its nuclear developments— but had extremely limited
success. The U.S. then used the SWIFT system of banking alongside its own
banking system to block Iranian oil sales and their payments. China and India
used their own currencies and clearing systems to bypass these blockades. As
we pointed out in the earlier article, this was not simply a financial
development but a shift in power to the East. The Iran story highlights the
importance of the development of the Yuan’s growing use.
China’s
viewpoint is not to challenge or attack the U.S. but to develop systems that
will be in its own interests and independent of outside political or financial
influences. Unhappily for the U.S. this is leading to the decline in U.S.
power, both politically and financially. With China and the emerging world
accounting for over half of the world’s population, the potential
growth here will mean an eventual huge curtailment in U.S. power and
influence. The agreement with Japan marks a major step forward in this
process.
Fragmentation of the Present Monetary System
Since
the Second World War and through the Bretton Woods system to today’s
monetary system, the dollar and the U.S., with its power and wealth, has
ensured its continued success, sometimes against basic fundamental reasoning
–such as the ability of the U.S. to just print dollar to cover its
Trade Deficits on an ongoing basis, a sort of Tax on the rest of the world.
Indeed, the dollar, with its link to oil, is the tree-trunk of world money
with all other currencies acting almost as branches growing out of that tree.
The steps being taken by China now is another tree (currently a sapling)
growing alongside it and eventually no longer dependent on it. The worry is
that this new tree is sapping the old tree of its strength. We are certain
that China will do all in its power to ensure it minimizes the influence the
U.S. has over its financial system.
The
dangerous period for the two trees is when the new sapling is not strong
enough to stand alone and the old tree is ailing. This is the time when
support is needed for both. That support has to be independent of both for it
to give effective support. That support must convince all in the monetary
world that it will give enough inherent strength to shore up the weaknesses
of both. But at the same time this support must be a common denominator
throughout the financial world.
If the
transition of power and through changes is smooth, then a new shape to the
world’s money will be easily accepted. But in all of man’s
history, such transitions have been far from smooth or peaceful;
they’ve been marred by confrontation and breakdown and usually both. We
see this future for the monetary world in the face of these developments.
With
the debt debacles on both sides of the Atlantic, the developed world’s
monetary system is vulnerable to such pressures as never before. The monetary
system now faces structural pressures that are bound to lead to turmoil and
deeper crises, not simply inside nations, but ones that will shake up global
foreign exchanges and breed more and more uncertainty. The last few years of
financial crises in the developed world will seem tame by comparison. The
separate interests of the developed world and the emerging world will
emphasize the uncertainty and lack of confidence that will hang like a cloud
over the world’s changing money systems.
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